Can Freeport-McMoRan’s Grasberg Issue Push Copper to a Deficit?

Most commodities have been plagued by surplus production over the last few years. Markets are in a surplus condition when production exceeds demand. A deficit occurs when demand exceeds production. The underlying demand-supply dynamics drive commodity prices in the long term.

A copper market deficit could support copper prices and raise the price action of miners such as Freeport-McMoRan (FCX), Rio Tinto (RIO), and Southern Copper (SCCO).

Late last year, Goldman Sachs turned bullish on copper. Max Layton, a Goldman Sachs analyst, noted that the copper markets could be in a deficit of 180,000 metric tons in 2017. Citi is also projecting a copper market deficit for 2017.

Earlier this year, the market’s opinion was quite divided over the 2017 copper market balance. The issues faced by copper are a bit different than the issues faced by steel and aluminum.

Although copper has faced surplus production levels, the surplus isn’t as much as steel and aluminum. Small changes in demand or supply growth can push copper from a surplus to a deficit. Marginal supplies of steel and aluminum react almost immediately to higher prices.

Miners such as Glencore (GLNCY) and Freeport-McMoRan (FCX) still aren’t expected to restart their idled capacities.

Now the key question might be whether production issues at Freeport-McMoRan’s Grasberg mine and BHP Billiton’s (BHP) Escondida mine could push copper into a deficit in 2017. Let’s take a look at that in the next and final part of the series.